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Price Gouging and the Pandemic: an Economic Perspective

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Price Gouging and the Pandemic: an Economic Perspective Volume 18 No. 1 Spring 2020 this view, shortages of products like hand sanitizer and toilet Price Gouging and the Pandemic: An paper may not have occurred during the pandemic if retailers Economic Perspective had been able to raise the prices of these products rather than instituting belated and easily circumvented purchase limits. Laurien Gilbert1 Other economists point out that the argument against market During declared states of emergency, sellers that raise prices intervention through price gouging laws ignores two key may face allegations of price gouging, leading to civil suits, issues: the potential for market failures during an emergency, state enforcement actions, and in certain circumstances, and the possibility that when the price of necessary goods federal enforcement actions. The current state of emergency is rises, lower-income households will be unable to afford them. no exception: the coronavirus pandemic has already begun to As to the first issue, an emergency may create market failures generate price gouging complaints, such as allegations that that give some sellers temporary market power. Such retailers and retailer platforms such as Amazon and eBay temporary increases in market power might result from the charged excessive prices for a range of items, including face shut-down of some of their competitors or from consumers’ masks, toilet paper and cleaning products.2 Grocery retailers reduced willingness to comparison shop during an emergency. and egg producers have been targeted by a California class The reduction in competition might allow some sellers to raise action alleging illegal price gouging related to egg prices after prices in response to the crisis-related demand increase by a state of emergency was declared.3 Meanwhile, consumers more than they would have been able to if they faced greater across the country have experienced shortages of certain competition.6 Imposing temporary price limits might mitigate goods. Economists recognize that rising prices and shortages this issue. As to the second issue, economists who support represent two sides of the trade-off inherent in considering price gouging laws point out that charging higher prices for price gouging laws. This article discusses how economics can necessities during an emergency will magnify issues be useful in navigating the line between recognizing the associated with income inequality. While higher prices can market realities of a crisis and running afoul of price gouging help to prevent or reduce hoarding, they may also result in laws. greater consumption of goods by the consumers who can easily afford them, rather than by those with the greatest need Economists debate whether price gouging laws help or during the emergency. 7 For this reason, some economists harm consumers argue that anti-price gouging laws may be worthwhile from a policy perspective if they reduce the unequal impact of an Many economists argue that permitting sellers to raise their emergency on lower-income consumers’ access to necessary 8 prices during an emergency actually makes consumers better goods, even at the cost of reducing market efficiency. off.4 Charging higher prices during an emergency may seem intuitively unfair (particularly if the seller’s margins increase), Pricing and cost considerations involved in assessing but when prices are permitted to rise during an emergency, the price gouging “price signal” helps to limit hoarding or over-consumption by consumers who do not value the scarce commodity enough to Enforcement against price gouging related to consumer goods pay the higher price.5 According to economists who espouse typically occurs at the state level—there is no federal anti- price gouging law, although some federal enforcement has 1 Laurien Gilbert is an associate at Cornerstone Research. The views taken place during the pandemic under the authority of the expressed in this article are solely those of the author, who is responsible for Defense Production Act (“DPA”).9 The fundamental element the content, and do not necessarily represent the views of Cornerstone Research. 2 Lauren Berg, Amazon Price-Gouged Amid Pandemic, Calif. Consumers Say, But Bad Economics, Forbes, Sept. 23, 2016, available at Law360, Apr. 22, 2020, available at https://www.forbes.com/sites/jeffreydorfman/2016/09/23/price-gouging-laws- https://www.law360.com/corporate/articles/1266266/amazon-price-gouged- are-good-politics-but-bad-economics/. amid-pandemic-calif-consumers-say; Dave Simpson, eBay Hit with Virus- 6 Matt Zwolinski, The Ethics of Price Gouging, Business Ethics Quarterly Related Price-Gouging Class Action, Law360, May 4, 2020, available at 18(3) (Jul. 2008), pp. 347-378 at p. 364. https://www.law360.com/articles/1270342/ebay-hit-with-virus-related-price- 7 Michael Hiltzik, Column: Memo to Economists Defending Price Gouging in gouging-class-action. a Disaster: It’s Still Wrong, Morally and Economically, L.A. Times, Aug. 28, 3 John R. Wilke, Federal Prosecutors Probe Food-Price Collusion, Wall St. 2017, available at https://www.latimes.com/business/hiltzik/la-fi-hiltzik- J., Sept. 23, 2008, available at price-gouging-harvey-20170828-story.html. https://www.wsj.com/articles/SB122213370781365931. 8 IGM Forum, Price Gouging, May 2, 2012, available at 4 IGM Forum, Price Gouging, May 2, 2012, available at http://www.igmchicago.org/surveys/price-gouging/. http://www.igmchicago.org/surveys/price-gouging/ 9 Although there is no federal anti-price gouging law, the Department of 5 Donald J. Boudreaux, “Price Gouging” After a Disaster Is Good for the Justice has taken enforcement action during the current pandemic against Public, Wall St. J., Oct. 3, 2017, available at alleged hoarding of medical supplies under an Executive Order pursuant to the https://www.wsj.com/articles/price-gouging-after-a-disaster-is-good-for-the- DPA, in cooperation with the Department of Health and Human Services public-1507071457; Jeffrey Dorfman, Price Gouging Laws Are Good Politics (“HHS”) and Federal Emergency Management Agency (“FEMA”). See American Bar Association 5 Volume 18 No. 1 Spring 2020 of a price gouging allegation under state statutes is the claim emergency may be scarce. Even for goods like cloth masks that the seller’s prices rose excessively after a declared state of that did exist prior to the pandemic, the entry of new sellers emergency.10 State price gouging laws typically presume that may make it challenging to determine whether a particular sufficiently large price increases during an emergency are seller is engaging in price gouging, or simply has higher costs evidence of price gouging, placing the burden on the retailer to to supply the product. Or, conversely, the new sellers may present mitigating factors. 11 Sellers that typically exhibit have costs that are not subject to the same shocks as the costs fluctuating margins or seasonal pricing may be at particular of larger producers, thereby distorting cost comparisons. risk of price gouging allegations if they raise their prices during a declared emergency. Low prices and/or margins in Given these challenges, an economic evaluation of the the period preceding the emergency may heighten the plausibility of price gouging allegations might start by mistaken impression of intentional price gouging.12 comparing the pricing behavior of the allegedly price gouging seller to other sellers in the same market. Some state price One unusual feature of the current crisis may be relevant in gouging statutes explicitly adopt this approach. 14 However, distinguishing the pandemic from the sort of emergencies even such a simple comparison can produce misleading envisioned in price gouging laws. The pandemic has conclusions if sellers in the same market priced differently introduced new products into daily life, like cloth face masks before the declared emergency. For example, retailers of and home coronavirus testing kits, as well as introduced new different types (supermarkets, convenience stores, online sellers of these products.13 With these new products and sellers retailers, etc.) might charge different prices for household may come challenges in applying state price gouging laws. goods like hand sanitizer and toilet paper even during normal The relevant price comparisons may be hard to establish for times. The more similar the set of retailers whose prices are products that did not exist before the pandemic, as in the case compared pre- and post-emergency, the more informative the of home coronavirus testing kits. In these cases, historical comparison is likely to be. price data to establish the prevailing price before the state of The FTC’s investigation into alleged gasoline price gouging after Hurricanes Katrina and Rita provides a useful example of Department of Justice, Combatting Price Gouging & Hoarding, May 5, 2020, how economists have attempted to construct informative price available at https://www.justice.gov/coronavirus/combattingpricegouginghoarding; comparisons in past emergencies. In order to ascertain how HHS.gov, DOJ and HHS Partner to Distribute More Than Half a Million widespread price gouging by individual gasoline retailers may Medical Supplies Confiscated from Price Gougers, Apr. 2, 2020, available at have been in the aftermath of the hurricanes, the FTC adopted https://www.hhs.gov/about/news/2020/04/02/doj-and-hhs-partner-to- a three-part “screen” that considered (1) whether the gas distribute-more-than-half-a-million-medical-supplies-confiscated-from-price- gougers.html.; Ballard Spahr, LLP, Understanding Price Gouging Laws station’s price relative to the city average rose immediately During COVID-19, JD Supra, Apr. 6, 2020, available at after the hurricanes, (2) whether the gas station’s price rose https://www.jdsupra.com/legalnews/understanding-price-gouging-laws- relative to other gas stations from the same brand and city and during-98583/. (3) whether its prices were in the top fifth percentile of prices 10 Note that in many states, price gouging laws apply only to retailers. In some cases, upstream wholesalers or distributors may also be subject to price charged in that city for at least three-fourths of the week 15 gouging laws.
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